Several officials at the Fed are beginning to worry about asset bubbles and excessive risk-taking as a result of their extraordinary policy interventions, James Politi writes for the Financial Times, citing interviews with multiple Fed presidents and members of the Board of Governors.
Details: Some are now pushing for "tougher financial regulation" as concerns grow that monetary policy is "encouraging behavior detrimental to economic recovery and creating pressure for additional bailouts."
What they're saying: “I don’t know what the best policy solution is, but I know we can’t just keep doing what we’ve been doing,” Minneapolis Fed president Neel Kashkari told the FT.
- “As soon as there’s a risk that hits, everybody flees and the Federal Reserve has to step in and bail out that market, and that’s crazy. And we need to take a hard look at that.”
Boston Fed president Eric Rosengren called for a “rethink” of “financial stability” issues in the U.S., and Fed governor Lael Brainard said in a speech last month that expectations of extended low-interest rates were boosting “imbalances” in the U.S. financial system, Politi reported.
Why it matters: Economists, strategists and fund managers on Wall Street have said for months that the Fed has effectively killed price discovery by "nationalizing" the bond market with its actions and is artificially holding up the price of financial assets.
- That has elevated U.S. economic inequality, and while market participants have cheered, the Fed's popularity has sunk among most Americans.
- Much of the U.S. economy, including jobs and spending at small businesses and firms not dedicated to e-commerce, continues to be weak.
The big picture: The latest comments from Brainard, Rosengren, Kashkari and others suggest that influential members of the Fed's policy-setting committee may be pushing back against the so-called Fed put — a belief among investors that if stock prices fall enough, the Fed will bail them out by lowering interest rates or by pushing trillions of dollars in liquidity into financial markets through quantitative easing.
- That has been the underlying principle of bullish stock market strategies over the past decade, including BTFD (Buy The F*cking Dip) and TINA (There Is No Alternative), that have emboldened traders to continue buying U.S. stocks despite grim economic conditions.
But, but, but: The tough talk may simply be a call for someone else to step up as the Fed continues to backstop markets.
- “For me, monetary policy is a very poor tool to address financial stability risks,” Kashkari told FT.
- And Rosengren added that the central bank lacks the tools to “stop firms and households” from taking on “excessive leverage.”